An analysis of the Property Crowdfunding industry

The industry has experienced a phenomenal amount of growth in recent years. There are several factors that I believe are contributing to the extremely rapid growth of the sector. Some of these are property related: the ability to allow your savings to track UK property prices without the hassle of owning a buy-to-let; the opportunity to get on the property ladder without first raising a significant deposit or having a mortgage; and the fact that property as an asset class has outperformed the FTSE All Share Index over the last 20-years. Over the last 20 years, UK property prices have grown by 14.34% p.a. on average (1). This is compared to the FTSE All Share index which has delivered 3.46% p.a. (2) on average over the last 20 years.

Property Crowdfunding Contribution to Sector Growth

Other factors include the increased transparency and accountability that can be provided by the crowdfunding sector and the technology that it harnesses. We believe this creates more control for investors – rather than investing in a fund, an ISA, or indeed any other traditional investment product, our proposition empowers you to invest in projects that you are passionate about with full disclosure about fees and the nature of the underlying asset.

I believe there is also the added benefit of real-estate expertise, which could take an individual decades to generate for themselves. Added to this, gaining access to property experts and the relationships they have across the country can be tricky without entering an existing network. This network can also ensure that the investment is hassle-free for investors – the potential benefits of being a landlord, without having to change a light bulb. To compound all of the potential benefits, the main opportunity of investing in property through crowdfunding, is the ability of retail investors to create a diverse investment portfolio due to the low entry point, which in our case is £10. We encourage our members to create a diverse investment portfolio, of which, in our opinion, real-estate should not be more than 10%, excluding their main residence.

High Demand but Low Supply for Property Crowdfunding

I believe we are observing a new crowdfunding platform enter the space every month and it comes down to the notion that there is a high demand and a low supply of this type of service. These new propositions range from business equity to bio-tech, but in particular there is a constant birthing of property crowdfunding companies. Traditionally, property investment is limited to those who have enough cash to get started, but thanks to property crowdfunding, there’s been a social change, driven by opportunity, fairness and inclusivity. The change is also driven by consumers’ desire for change and an alternative, and with the increasingly sophisticated ‘internet of things’, retail investors can now control an investment portfolio from their own home. Access to the internet and information is only going to increase, and with increased exposure to Alternative Finance, people can make more considered investment decisions.

What Does the Future Hold for Property Crowdfunding?

In the future, I think consolidation and institutionalization could precipitate the most rapid phase of expansion in the industry. I believe most new firms underestimate the amount of cost and regulatory expertise that is required to create a business that operates within a regulated environment. It is not the case that a property firm can easily create an online investment platform – corporate finance and legal experience is essential.

We forecast that the institutionalization of the industry, which could involve a trade sale or an IPO, is still a number of months away, although some comparable firms in the United States have already adapted their model to operate within a more traditional framework. The products offered is expected to evolve in the next 24 months as significant institutional firms harness the power of the crowd. Property Moose has already raised over £500,000 from the Crowd as part of a syndicate with a private equity firm that has originated several billions of pounds of deals.

As a financial platform, we are advocates of strict regulation and enforcement by the FCA in order to promote best practice and limit the exposure of retail clients to rogue firms and potentially risky investments. This also builds trust and credibility in the marketplace, which we believe has been useful to our growth so far. Indeed, we have been in consultation with the FCA since our incorporation to assist in the creation of the industry standards. The regulatory environment is evolving in real-time as the industry matures, which means firms need to be ready to pivot at any time to change their model to fit new rules. I believe this is the biggest problem facing all firms – a change in regulation could very quickly destroy the crowdfunding sector.

Will Compliance Stunt the Growth of the Property Sector?

‘Compliance’ is also a significant cost to our business, and requires attention from every member of the team one hundred per cent of the time, and a significant budget to back it up. It is also very time consuming on an operational level. These factors conspire to limit innovation as new firms are being prevented from succeeding in the space, and those that are, have depleted resources. That said, I don’t think firms should be more or less regulated as they are already very closely and appropriately scrutinized. More clarity from the FCA would be helpful, and a robust, unchanging approach from the regulator would help to stabilize the industry, and allow more innovation. Property Moose is an Appointed Representative of Resolution Compliance Limited, who authorize us to ‘arrange and promote investments’.

Regulation

As above, the biggest risk to the industry would be a change in regulation. The industry is still nascent, and any fundamental changes to rules may be beyond the ability of the existing firms to weather. Even a small change could prevent a business from being commercial for one month, which may be a cost that the balance sheet can’t handle. The second major risk is down to market sentiment and reputation. As the industry is still growing, trust is absolutely critical to sustaining growth. Everyone that has transacted on an alternative finance platform is an ‘early adopter’, despite the industry being 5-years old. If a group of these investors are misled or ‘burnt’, the impact on the industry could be catastrophic. There is also a ‘key-man’ risk within the industry. There are very few organizations with high caliber teams, and retaining expertise, knowledge, and keeping the pioneers within the industry will likely be increasingly difficult as firms institutionalize.

Risk

Investing does involve risk, and it is vital that investors conduct their own due diligence before investing, and ensure the platform they choose to use is credible and compatible with their risk profile and investment aims.

The Future

Soon, I believe we will witness the creation of ‘hybrid platforms’. The industry is still very fragmented, with business equity, debt, property, bio-tech, and others, all on different platforms hosted by different organizations. The next major advancement for the industry will likely be the creation of a true ‘one-stop’ marketplace. I think this will go beyond a simple aggregator model, and the platform will be hosted by an institution that already offers a range of products to sophisticated and high net worth individuals. It’s possible that we will also see the adoption of more innovative and ergonomic technologies by traditional financial institutions. Larger established firms will likely want to use the learnings from innovative start-ups and early-stage businesses to improve their offerings and capture the new market that alternative finance firms have created.

This may also lead to the acquisition or strategic investments of some of the new businesses by the venture arms of banks or wealth managers. There are also dozens of innovations that we have on the Property Moose that are due to be released to the market in 2017.

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Property Moose does not provide any advice in relation to investments and you must rely on your own due diligence before investing. Please remember that property prices can go down as well as up and that all figures, rates and yields are projections only and should not be relied on. If in doubt, please seek the advice of a financial adviser. Your capital is at risk if you invest. This post has been approved as a financial promotion by Resolution Compliance Limited.

Property Moose is a trading name of Crowd Fin Limited which is an Appointed Representative of Resolution Compliance Limited which is authorised and regulated by the Financial Conduct Authority (no: 574048).

Risk Warning

Your capital is at risk. The value of your investments can go down as well as up and you may get back less than you invest. Please seek independent financial advice if you are unsure whether an investment is suitable for you. For more information, please see our full risk warning.